2/10/2012

Eurozone dismisses Greek budget deal

Eurozone finance ministers dismissed as incomplete a reputed €3.3bn package of Greek budget cuts presented to them in the hope of securing a new €130bn bail-out and sent the country’s finance minister back to Athens with a fresh set of demands and an urgent deadline.

In exchange for signing off on the loan, which Greece is depending on to avoid a potentially chaotic default next month, its lenders are demanding €325m in further cuts to this year’s budget, parliamentary approval of a sweeping reform package and a pledge from the country’s political leaders to ensure that they will maintain their commitment after April elections.

They also warned of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets.

‘In short, there is no disbursement before implementation,’ said Jean-Claude Juncker, the prime minister of Luxembourg and head of the eurogroup, bemoaning a succession of broken promises from Athens.

If those conditions were met, then Mr Juncker said finance ministers would reconvene on Wednesday to sign the loan agreement, and set in motion a private sector bond swap that is expected to cut some €100bn from Greece’s €350bn debt pile and help restore its finances. The details of that exchange were virtually complete, officials said.

The reception in Brussels marked a sharp contrast from the near-euphoria with which Greece’s political leaders presented the deal earlier in the day that they billed as the solution to weeks of market-rattling brinkmanship.

Through the loan package and bond swap, Greece’s lenders are trying to lower the country’s debt-to-GDP ratio to 120 per cent by 2020. Hopes for an agreement were raised by Mario Draghi, president of the European Central Bank, who indicated that he was willing to forgo profits on the bank’s €40bn in Greek bonds, a move that could wipe up to €15bn off of the country’s debt load.

Without the ECB’s co-operation, the International Monetary Fund has determined that it will be impossible to reduce Greece’s debt sufficiently through the restructuring of private debt alone. Private bondholders have agreed to take a €100bn writedown on the €200bn in Greek debt they hold.

In order for the ECB to rid itself of the Greek bonds, it would probably have to sell or swap them at cost to the eurozone’s rescue fund, the European Financial Stability Facility.

Mr Draghi said the bank could not accept losses on its Greek holdings because this would amount to the central bank directly financing the Greek government. Such “monetary financing” is illegal under European Union treaties.

But he signalled that the bank was willing to forgo profits on the €40bn portfolio, which would pay out an estimated €55bn if redeemed at maturity. “If the ECB distributes profits to some of its member countries ... that’s not monetary financing,” he said, speaking at a press conference after the central bank’s monthly governing council meeting.

Eurozone officials doubted, however, that governments would be willing to add to the already hefty €130bn Greek bail-out to pay for the bonds.

“We will certainly not discuss a top-up,” said Wolfgang Schäuble, the German finance minister, noting that a €130bn limit was agreed at an EU summit in October. “We are negotiating within the mandate that heads of state and government have given us.”

The €130bn limit – and the target of reducing Greece’s debt to 120 per cent – were both agreed in October, but EU and IMF officials have said Greece’s economic conditions have worsened significantly since then, meaning more bail-out cash and more debt reduction will be required than originally anticipated.

As if to drive the point home, Athens said on Thursday that industrial output fell 11.3 per cent in December from a year ago and unemployment rose in November to an all-time high of 20.9 per cent.

Germany’s unwillingness to lend more money – a stance held by the eurozone’s other triple A rated countries, Finland and the Netherlands – could complicate the bail-out negotiations.

There were already signs of resistance in Athens. Yannis Koutsoukos, the socialist deputy labour minister, resigned from his post, saying the package was “too painful for working people”. Trade unions said they would start a 48-hour general strike, the second this week, on Friday.

But, when asked whether the Greek parliament, which will vote on Sunday, could pose difficulties, Mr Juncker displayed supreme confidence. ‘The answer is simple and easy: The Greek parliament will not reject the package.’

Evangelos Venizelos, Greece’s finance minister, added: ‘This is a time of difficult decisions. No one can hide.’